Rates, growth… Would a fall of the government plunge France into “the storm”?

© XOSE BOUZAS/ Hans Lucas via AFP

Special law or ordinance, France has several means of avoiding a paralysis which would prevent civil servants from being paid, for example. But let a new Prime Minister adopt “a watered down budget» including concessions or that the 2025 budget is identical to that of 2024, the country would miss its objective of reduce its public deficit to 5% of GDP next yearpredicts Maxime Darmet, economist at Allianz.

A renewed 2024 budget, resulting in a freeze in state spending in value terms, would represent between 15 and 18 billion euros in savingsexplains Mathieu Plane, economist at the OFCE. That is to say a level close to the effort planned in the initial finance bill (PLF) for 2025. Social spending, automatically indexed to inflation, would however be increasing while the State would have to renounce tax increases. – at least 20 billion euros – which he envisaged, such as the surtax on very high incomes or the profits of large companies.

The Natixis bank estimates that in such a scenario, the deficit would reach 5.3% you PIBwhile Paris is already singled out by Brussels for its excessive public deficit. In the case of a technical budget, retirees would see their pension increased in line with inflation on January 1, while the government only planned to do this completely for pensions below the minimum wage, with a delay.

The threat of a greater income tax burden is also brandished by the government. “Nearly 18 million French people will see their income tax increase, others will pay it for the first time because it was not possible to include in the finance law the reindexation which is planned (…) for the scale of tax brackets, it’s inevitable», Said Prime Minister Michel Barnier, invited by France 2 and TF1 on Tuesday evening.

Low growth

This scenario is, however, far from being the most likely for the director of economic studies at the IESEG School of Management Eric Dor, contacted Tuesday evening by AFP. A budget for 2025 voted later, during the year 2025, “will necessarily contain this clause since it is customary to put it“, he emphasizes.

Local authorities, whose allocations paid by the State risk being frozen, could be among the losers, underlines Maxime Darmet, who sees this as a risk for the functioning of public services. Some could compensate for the shortfall by raising local taxes, notably property taxaccording to him.

The reduction in spending will weigh on growth, to varying degrees depending on the scenario. “With a budget renewed in the terms of 2024, and in particular on the expenditure part, we would have a reversal of what has made it possible, for the moment, to maintain a little growth in France”, namely public investmentexplains Charles-Henri Colombier, director of economics at Rexecode. The increasing tax burden on household income would also not be likely to encourage consumption.

Added to this would be an accentuation of the negative effect of political uncertainty – hitherto estimated at 0.2 point of GDP for 2025 by the OFCE – which would lead households and businesses to a prolonged wait-and-see attitude. Mr. Colombier also mentions the growing distrust of foreign investors. And less growth means less tax revenue, complicating the budgetary equation.

Financial shocks

«The consequences of censorship could cost us the trust of our creditors and our neighbors“, warned on Tuesday the president of Medef Patrick Martin, the leading employers’ organization. Resistant to uncertainty, financial markets are already experiencing tremors. After Michel Barnier held his government accountable, the ten-year French public bond rate immediately climbed, passing in a few hours from 2.86% to 2.92%.

The «spread», gap between the rates of France and Germany, a barometer of investor confidence, also experienced a rapid increase on Monday, to 0,88 point. «The impact of this political instability, you will see it immediately in the interest rates which are strangling us», declared Tuesday evening Michel Barnier, referring to “gigantic sums to pay interest to financiers, Chinese, Japanese or American investment funds».

In its misfortune, France has a strong ally: the European Central Bank. In June, it initiated a policy of lowering rates, made possible by the decline in inflation in the euro zone, easing the pressure on interest rates on government bonds. It remains that “if nothing changes in the coming months, weariness could set in on the markets, and then everything could get out of hand very quickly», warns Aurélien Buffault, bond manager of Delubac AM.